At 4 billion USD, the amount of money at stake in India’s microcredit industry seems insignificant if compared to that of the US sub-prime mortage crisis . Yet India is not only a fast- growing economy but also home to a huge number of poor, who have become dependent on microcredits for their livelihood. This is the main reason why the microcredit industry’s recent crisis there has dealt a severe blow to India’s hopes of letting the market forces solve the poverty problem.

The microcredit industry worldwide was kick-started by Dr Muhammad Yunus. By making loans worth a few hundred dollars mostly to women living in poor rural communities in Bangladesh, his Grameen Bank contributed heavily to alleviating endemic poverty in the country by stimulating the development of small-scale cottage industries. Founded in 1983, “the poor’s bank” has 2,564 branches today, a staff of 19,800 and 8.29 million customers, of which 97 percent are women living in villages across Bangladesh. The bank’s success in financially assisting the poor and promoting self-employment was rewarded with a Nobel Peace Prize and it influenced policymakers at a time when belief in the power of the market forces to bring about economic development and prosperity, even to the poorest of nations, was at its peak.

Hoping to assist its own poor, India established a microcredit industry as well, albeit radically different from the experiment in Bangladesh. Initially, the lenders of microfinance for the poor were NGO’s. For the past 10 years, unfortunately, for-profit foundations, venture capitalists and even the World Bank became major players in India’s fast-growing microcredit industry. One such company, SKS, that sports George Soros and one of the founders of Sun Microsystems as stakeholders, has doubled in size every year for the past few years. In August 2010, the company’s initial public offering has raised 350 million USD. Its brand of “inclusive growth”, however, has hurt many an Indian borrower, especially in Andhra Pradesh, which is today at the epicentre of India’s microcredit crisis.

According to Vijay Mahajan of Basix Microfinance, SKS as well as many other microfinance lenders are guilty of growing too fast, lending too aggressively to customers who lacked – as in the US – the ability to repay their loans, and of concentrating their activity in the same geographical area. By charging interest rates ranging between 15 and 35 percent, these companies now stand accused by Indian local politicians like Reddy Subrahmanyam of “making hyper-profits off the back of the poor”. In October, together with some colleagues from Andhra Pradesh, Mr Subrahmanyam has pushed through legislation aimed at regulating lending and collection of microcredits. The same month, 2 billion USD outstanding went unpaid, in order to force microcredit companies to offer better and cheaper loans to India’s poor. In Dr Yunus’ view, microcredits should not have been used as a profit-making vehicle in the first place – one of the reasons why so many of India’s poor find it hard, if not impossible, to repay outstanding loans.

In Andhra Pradesh where the current crisis has erupted, there are some 975.362 self-help groups (SHG) with 11 million members, acting as collective borrowers from banks or microcredit companies. Fifty percent of the state’s poor have taken out multiple loans, whilst 80 percent of them do not work in agriculture, trying to make a living as small-scale distributors of vegetables and dairy products instead, or as rural tailors or carpenters and the like. Whilst India’s banks require loan applicants to wait for three, sometimes five months, the microcredit companies approve a loan in only three days, without means testing any of them. Repayments are required weekly, interest rates are high and collection agents have already pushed 54 roughed-up customers to commit suicide.

The mistaken belief that market forces can be counted on for everything, including the eradication of poverty, is the ultimate cause of the present-day Indian microcredit debacle. Dr Yunus had established his bank in a largely Islamic country, where assisting the poor is one of the four pillars of Islamic faith and, at the same time, money-lending for profit is expressly forbidden. Outside Bangladesh, however, the microcredit industry cannot truly contribute to alleviating the plight of the poor. As India’s case proves, reliance on the forces of the market might even aggravate matters.

Another lesson from the current crisis that cannot be ignored is that in eliminating poverty there is no substitute for resolute government action and for redistribution of wealth policies. In other words, the state-centered Beijing consensus and development model does a much better job of fighting poverty than the Washington consensus, focused on deregulation, the market and political democracy. Anti-poverty policies were successful to date only in countries like China, Brazil ,Venezuela, Bolivia or Ecuador, where the state is actively managing and financing projects to that effect. The sooner Indian politicians realise this, the better for India’s poor. (sources: NYT, Courrier International, The Times of India, Down to Earth magazine, Grameen Bank website)

About: Spotlight on Geopolitics

Florian Pantazi is an historian and geopolitical consultant. The focus of his research is the European Union's role as a global actor, its influence in Asia and Latin America, as well as the major geopolitical shifts confronting the international community of states. Apart from his interest in European external affairs, he has -- since 1998 -- researched and authored articles on the emergence of China and its geoeconomic agenda ; Turkey's Islamic model of democracy; the Asian and global financial crises; the most recent political evolutions in the Maghreb.

Florian Pantazi holds a Master in Geopolitics and International Relations from Sciences Po Toulouse and an MA in History from the Al.I.Cuza University, Iasi, Romania. Contact: florian.pantazi @ gmail.com Twitter: @Geopolinsider

At the end of February, Caritas International has released its 2015 Report on poverty within the European Union. According to its authors, six years of enforced budgetary authority have gravely affected 125 million EU citizens who are now forced to live under the poverty thresholds of their respective countries.The worst-hit countries are EU members such […]

One hundred and eighty years ago (1834) , the newly-founded Academy for Moral and Political Sciences in Paris organized a competition for the best research paper on the causes and various manifestations of poverty in Europe. The best research paper on the subject, which won its author a 2,500 francs prize offered by baron Félix […]